Most recently, IRS and Treasury proposed and final guidance on PPA hybrid plan provisions may further contribute to the loss of interest by plan sponsors in continuing DB plans.  Hybrid plans appear to be the last bastion of the DB system, and well-designed hybrid plans are responsive to both the retirement security needs of employees and the business and financial imperatives of sponsors. 

Cash balance plans are the most common hybrid plans. They provide lifetime income guarantees, spousal death benefit protection, and PBGC guarantees. After years of litigation and, to some extent, regulatory uncertainty surrounding these plans, Congress stepped in and, in the PPA, unambiguously recognized hybrid plans and removed legal and regulatory impediments to allow them to flourish.  It was hoped that the guidance that Treasury and IRS needed to issue would recognize the intent of PPA to foster hybrid plans by providing guidance that clarified and applied PPA provisions in a positive and flexible manner consistent with the Congressional intent. In some ways, the agencies have done that, but, for the most part, the guidance has been based on a principle that is fundamentally at odds with Congressional intent; While Congress sought to clear a place in the regulatory jungle for hybrid plans to grow, the regulators appear to view the PPA as imposing new limits on hybrid plans to rein them in -- and a complicated web of regulations imposing significant and unanticipated new restrictions and requirements has ensued.

Several objectionable or questionable provisions of the regulations include:

• for the first time, hybrid plans would be prohibited from offering subsidized benefits, including early retirement subsidies and subsidized joint and survivor annuities;
• the regulations take a relatively narrow view of what constitutes a permissible market rate of return, meaning that plans are restricted from offering investment rates tied to many different types of investments that are actually available in the market;
• the regulations seek to minimize the value of minimum guaranteed returns, even though the PPA expressly permits these returns and even requires a minimum floor of zero percent, cumulatively;
• the regulations impose restrictive limits on transitioning from the old to the new rules and add some confusion because the regulations were issued after the statutory PPA transition rule expired- leaving little guidance about how to modify plans consistent with the anti-cutback rules;
• the regulations revived the concept of "whipsaw" (under some circumstances) that many believe PPA intended to end;
• the regulations take a very broad view of what constitutes a plan conversion and thus the circumstances under which the special PPA conversion protections apply;
• the regulations provide little guidance regarding pension equity plans.

The IRS and Treasury received many comments on their proposed and final regulations and recently held hearings on them. I understand that the regulators have a difficult job, presumably want to protect participants, and provide guidance consistent with the intent and terms of the PPA. It is hoped that revised rules are more aligned with the PPA provisions and statutory intent and further the maintenance and possible growth of the db system rather than foster its likely further contraction.   

-- Scott J. Macey
Of Counsel
Covington & Burling LLP